International Trade Policy: Game of Chicken

by Paul Hoffmeister, Portfolio Manager and Chief Economist

Since their respective highs on February 19, the S&P 500 and Nasdaq Composite have fallen -13.7% and -19.3% through Friday, April 4. Based on the MSCI All Country World Index of developed and emerging markets, over $11 trillion in market wealth has vanished. For the moment, financial markets appear to be expecting more inflation, slower growth, and less international trade. 

The equity selloff correlates with President Trump’s new tariff policies, the specifics of which began to slowly emerge in early February and the breadth and depth of which were revealed after the market close on Wednesday, April 2. The President announced a 10% baseline tariff for all exporters into the United States, and additional reciprocal tariffs on as many as 60 countries that the President believes are the worst offenders in maintaining high barriers against American exports.  
 
Of course, markets seemingly panicked last Thursday and Friday, as they discounted the economic implications as well as the possible retaliations from trading partners. China, for that matter, quickly announced 34% retaliatory tariffs on Friday morning. There are rumors that others, including the European Union, will also be instituting their own retaliatory measures. On the other hand, countries such as Taiwan and Vietnam, Indonesia and India, are pursuing constructive discussions to level trade levies and restrictions against the United States.

It remains to be seen if the White House will impose additional tariffs or punitive measures against the retaliating countries. 

The following are some notable details from Yale’s Budget Lab about the April 2nd Trump tariffs and all other tariffs imposed by the Trump Administration year-to-date. [1]

• China will have a 54% tariff (34% reciprocal tariff, plus the 20% imposed earlier this year). If one adds tariffs imposed during Trump’s first term, China tariffs will be 76%.

• Japan, South Korea and India will face tariffs of 25%.

• European imports face 20% tariffs (but 25% on vehicles).

• Average effective US tariff rate will be 22.5%; the highest since 1909. The April 2nd plan raised it 11.5 percentage points.

• Due to all tariffs imposed this year, the price level in 2025 will increase 2.3% during the short run.

• Yale’s Budget Lab forecasts US real GDP growth will decline -0.9% in 2025 due to the April 2ndtariffs and all other U.S. tariffs imposed this year. During the long run, all recent tariffs are expected to reduce US real GDP growth by -0.6% annually.

So where do equity markets go from here? During the short-term, we expect broad market indices will react positively to compromises reached with countries that reduce trade barriers, and negatively to retaliations and other aggressive reactions. 

Optimists will argue that the tariffs announced to date will be a high watermark and the starting point of negotiations that ultimately reduce barriers around the world. This would be a highly bullish scenario. Unfortunately, while we believe this will be true with certain trading partners, we don’t believe that it will be the case with all. Relations with China, for example, appear to be worsening as opposed to improving. 

During the medium term, we expect earnings expectations to be revised lower, from already lofty expectations at relatively high stock valuations. And during the longer term, a recession, long-delayed and rooted in massive post-Covid government spending, is increasingly likely.

Key variables we’re watching for will be the degree to which compromises or retaliations occur, upcoming tax reform in Congress, and changes in Fed policy. Better pro-growth tax plans or a more aggressive rate-cutting Fed would be equity market positives. 

Lost in most of the public discourse today is the question: where is pro-growth tax policy to ignite risk appetites? This is not just a question for Washington, but legislatures around the world.

We suspect financial markets will need to perform even worse to extract such surprises. 

The “Trump put” and “Fed put” are seemingly off the table, for now. 

On Sunday night, the President defended his recent trade actions: “I don’t want anything to go down, but sometimes you have to take medicine to fix something.”

As for the Fed, it typically pursues a sharp pivot to rate cuts in reaction to deflationary pressures and/or freezing credit conditions. Given that the new tariff policies are expected to be inflationary in nature, more pain in credit markets is probably necessary for the central bank to step in. 

As a result, financial markets seem to be watching a game of chicken between the United States and the rest of the world with international trade policy. But it’s arguably a game of chicken among executive and legislative policymakers globally. Eventually, countries, national legislatures, or central banks will blink. The question of course is, how much will break in the meanwhile.

------------------  

[1]  Where We Stand: The Fiscal, Economic, and Distributional Effects of All U.S. Tariffs Enacted in 2025 Through April 2 | The Budget Lab at Yale

Paul Hoffmeister is Chief Economist and Portfolio Manager at Camelot Portfolios, managing partner of Camelot Event-Driven Advisors (CEDA), and co-portfolio manager of the Camelot Event-Driven Fund (EVDIX • EVDAX).

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Disclosures:
•       Past performance may not be indicative of future results. Therefore, no current or prospective client should assume that the future performance of any specific investment, investment strategy (including the investments and/or investment strategies recommended by the adviser), will be profitable or equal to past performance levels.
•       This material is intended to be educational in nature, and not as a recommendation of any particular strategy, approach, product or concept for any particular advisor or client.  These materials are not intended as any form of substitute for individualized investment advice.  The discussion is general in nature, and therefore not intended to recommend or endorse any asset class, security, or technical aspect of any security for the purpose of allowing a reader to use the approach on their own.  Before participating in any investment program or making any investment, clients as well as all other readers are encouraged to consult with their own professional advisers, including investment advisers and tax advisors.  Camelot Event Driven Advisors can assist in determining a suitable investment approach for a given individual, which may or may not closely resemble the strategies outlined herein.
•       Any charts, graphs, or visual aids presented herein are intended to demonstrate concepts more fully discussed in the text of this brochure, and which cannot be fully explained without the assistance of a professional from Camelot Portfolios LLC.  Readers should not in any way interpret these visual aids as a device with which to ascertain investment decisions or an investment approach.  Only your professional adviser should interpret this information.
•       Some information in this presentation is gleaned from third party sources, and while believed to be reliable, is not independently verified.
•       Camelot Event-Driven Advisors, LLC, is registered as an investment adviser with the United States Securities and Exchange Commission. Registration as an investment adviser does not imply any certain degree of skill or training. Camelot Event-Driven Advisors, LLC’s disclosure document, ADV Firm Brochure is available at http://adviserinfo.sec.gov/firm/summary/291798

Copyright © 2025 Camelot Event-Driven Advisors, All rights reserved.

No Trump Put, For Now?

by Paul Hoffmeister, Portfolio Manager and Chief Economist

The market narrative during the last month has been consistent with the expectation we shared in our last client letter, that policy volatility will lead to market volatility. As of last Friday, the S&P 500 and Nasdaq Composite were down -6.0% and -9.3%, respectively, from their February highs as President Trump began to implement his new tariff plans, a central component of his economic plan. 

Given Trump’s unique style of public negotiation and his back and forth with other leaders, the tariff implementation has been challenging to keep track of. This itself can be difficult on financial markets, as investors love policy certainty and clarity. 

To summarize the tariff news so far: on February 1, Trump signed executive orders imposing a 25% tariff on all goods imported from Canada and Mexico, with a 10% tariff on Canadian energy products. Initially scheduled to take effect on February 4, they were delayed by a month. The Administration also imposed an additional 10% tariff on Chinese imports, which is on top of the existing 25% tariff on many Chinese goods. And on February 10, 25% tariffs on steel and aluminum imports from all countries were announced; they’re scheduled to take effect this week. And just last week, President Trump temporarily spared Canadian and Mexican automobile imports from a planned 25% tariff. Trump has also promised that he’ll announce in April more details on forthcoming reciprocal tariffs against any countries whose import duties are unequal to the United States’.

In response to a question last Thursday over whether he is creating exceptions in reaction to the market volatility, the President said, "[They have] nothing to do with the market. I'm not even looking at the market, because long-term, the United States will be very strong with what's happening." [1]

We believe this to be indeed the case because we view Trump’s tariff plans as policy rather than a mere negotiating tactic to acquire concessions without any ultimate changes in existing US tariff schedules. As such, we expect many of Trump’s desired tariffs to be eventually implemented in an effort to create more equivalent trade rules with the rest of the world. Of course, concessions from some countries are delaying implementation. For example, Canadian and Mexican efforts to increase certain border and drug anti-trafficking enforcement have won those countries temporary reprieves. 

As a result, the tariff implementation process could take many months (or even longer) which could lead to more sawtooth movements in financial markets.

The President’s comment last week that he isn’t paying attention to the stock market belies his reputation as a stock market president. It also raises an important possibility: perhaps the “Trump put” is gone from the market, at least for now. 

Last Friday, Treasury Secretary Scott Bessent followed up on that notion on CNBC. He said: “There’s no put. The Trump call on the upside is, if we have good policies, then the markets will go up.”

Bessent then alluded to the idea of a Biden-Trump economic transition: “Could we be seeing that this economy that we inherited starting to roll a bit? Sure…Look, there's going to be a natural adjustment as we move away from public spending to private spending. The market and the economy have just become hooked, and we've become addicted to this government spending. And there's going to be a detox period.”

It appears that the Trump Administration’s current economic view is that it must reduce government spending (to limit higher interest rates), rebalance trade relationships (to equalize trade levies), and extend the 2017 tax cuts (to maintain current incentives to produce). And, if the economy is already slowing and there is some friction from the Biden-Trump policy transition that aims to reduce government largesse and create “fair” trade rules, so be it. 

One could argue from the Administration’s view that any near-term economic and equity market weakness will even reinforce the case for the Fed to cut interest rates later this year, which could then set up the economy (and the Administration) favorably in 2026.

This logic seems consistent with Bessent’s comments in a Fox News interview in early February when he told Larry Kudlow: “The President wants lower rates… He and I are focused on the 10-year Treasury and what is the yield of that.” 

With stock markets at historically elevated valuations and not far from all-time highs and with the economy slowing at the margin, perhaps the Trump Administration is playing with the house’s money.  “Risk-on” investors should take note. While we don’t believe the Administration’s view is permanent, it seems -- for now -- more focused on lower Treasury yields than the general level of the stock market.

------------------
 

[1] “Trump expands exemptions from Canada and Mexico tariffs”, by Natalie Sherman and Michael Race, March 6, 2025, BBC News.

Paul Hoffmeister is Chief Economist and Portfolio Manager at Camelot Portfolios, managing partner of Camelot Event-Driven Advisors (CEDA), and co-portfolio manager of the Camelot Event-Driven Fund (EVDIX • EVDAX).

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Disclosures:
•       Past performance may not be indicative of future results. Therefore, no current or prospective client should assume that the future performance of any specific investment, investment strategy (including the investments and/or investment strategies recommended by the adviser), will be profitable or equal to past performance levels.
•       This material is intended to be educational in nature, and not as a recommendation of any particular strategy, approach, product or concept for any particular advisor or client.  These materials are not intended as any form of substitute for individualized investment advice.  The discussion is general in nature, and therefore not intended to recommend or endorse any asset class, security, or technical aspect of any security for the purpose of allowing a reader to use the approach on their own.  Before participating in any investment program or making any investment, clients as well as all other readers are encouraged to consult with their own professional advisers, including investment advisers and tax advisors.  Camelot Event Driven Advisors can assist in determining a suitable investment approach for a given individual, which may or may not closely resemble the strategies outlined herein.
•       Any charts, graphs, or visual aids presented herein are intended to demonstrate concepts more fully discussed in the text of this brochure, and which cannot be fully explained without the assistance of a professional from Camelot Portfolios LLC.  Readers should not in any way interpret these visual aids as a device with which to ascertain investment decisions or an investment approach.  Only your professional adviser should interpret this information.
•       Some information in this presentation is gleaned from third party sources, and while believed to be reliable, is not independently verified.
•       Camelot Event-Driven Advisors, LLC, is registered as an investment adviser with the United States Securities and Exchange Commission. Registration as an investment adviser does not imply any certain degree of skill or training. Camelot Event-Driven Advisors, LLC’s disclosure document, ADV Firm Brochure is available at http://adviserinfo.sec.gov/firm/summary/291798

Copyright © 2025 Camelot Event-Driven Advisors, All rights reserved.

Trump Policy Changes, AI, and the Economy

by Paul Hoffmeister, Portfolio Manager and Chief Economist

Summary: The FOMC left its fed funds target range unchanged at 4.25%-4.5% at its last meeting on January 29th, as year-over-year CPI stands at +2.9% and unemployment remains low at 4%. Interest rate futures currently expect the funds rate to be lowered to approximately 4% by year-end, whereas in last September, markets were expecting it to be cut below 3%. Stubborn inflation has compelled the Fed to be on pause for the foreseeable future, but policy is still expected to loosen a bit later this year as the economy appears to be slowing ever so slightly… With the Fed variable stagnant for now, the dynamics of the market appear to be focused on the massive policy changes coming from Washington, as well as within the AI sector. Below, we provide updates on the outlooks on trade, taxes and geopolitics, as well as AI – all of which seem to be creating for more volatile market conditions. 

Volatility & Major Policy Changes: In last month’s client letter, we explained how an influx of major policy changes by the new Trump Administration would lead to increased market volatility – both positive and negative. And indeed, February 2nd and 3rd were a good example, as the major US stock index futures traded lower Sunday evening by -1.5% to -2.5% following news that President Trump would soon implement 25% tariffs on Canada and Mexico, and 10% tariffs on China. By the end of the market close the following day, stock indices recovered some of those losses as it became clear that the Canada-Mexico tariffs would be paused for 30 days. The reprieves were granted in exchange for stronger border and drug enforcement measures. At the moment, however, President Trump’s threat of new China tariffs remains, and the Chinese government has countered that it will impose retaliatory tariffs of their own on 80 different manufactured and energy products from the United States, including coal and liquified natural gas. We expect China to play more hardball. 

Policy volatility and the corresponding ups and downs in the market are what we expect this year as major policy changes emerge and take shape. Of course, forecasting the policy changes and their implications is made even more challenging because, in keeping with the unique style of President Trump, the policy announcements or actions themselves can often be part of a public negotiation, sometimes with and sometimes without a clear timeline.

So, what major announcements or actions should we additionally expect during the coming months? This week, the White House has pledged 25% tariffs and steel and aluminum imports, as well as reciprocal tariffs on many countries. We also expect to hear more details of additional tariffs against European countries within the next month. And clearly late this month, we may hear more about the planned tariffs against Canada-Mexico as well as China.

More information is also emerging about President Trump’s tax plans. According to White House press secretary Karoline Leavitt, the priorities will be to extend the 2017 tax cuts, eliminate taxes on tips and social security benefits, increase the limit on state and local tax deductions, reduce taxes on “Made in America” products, and close loopholes for private equity (carried interest) and sports team owners. We continue to expect new tax legislation to be completed by May or June, at the earliest. 

Our big questions about the emerging tax law changes are: will the 2017 tax cuts be temporarily or permanently extended, and will there be any tax cuts on capital (such as capital gains and dividends)? Arguably, a permanent extension would be more stimulative than the current proposals, and tax reductions on capital gains and dividends (even inflation indexation) would be even much more pro-growth than current proposals -- and enduring in their stimulative effects. 

Of course, with any tax legislation, the devil will be in the details. If Republicans plan to pass it via the budget reconciliation process, it will need to be scored revenue neutral by the Congressional Budget Office. Some estimate that the current tax proposals will cost at least $5 trillion. What revenue raisers will be used to “pay for” the tax cuts? The anticipated savings from newfound government efficiencies and spending cuts (Elon Musk’s “DOGE”) and new tariffs will likely be critical. But will there be significant tax increases that the market is not yet aware of?

Beyond economic policy, we expect to learn more about President Trump’s Ukraine peace plans at the Munich Security Conference between February 14-16. Bloomberg reported that General Keith Kellogg, the President’s Ukraine envoy, will outline the Administration’s initial proposals. Again, this will likely be the starting point of negotiations, that will be both public and private in nature. Over the weekend, the NY Post reported that President Trump said he’s already spoken with Russian President Putin. On Sunday, Kremlin spokesman Dmitry Peskov stated that he could neither confirm nor deny the report. The following day, Russian deputy foreign minister Sergei Ryabkov suggested that an announcement on talks could be forthcoming, while adding that US-Russian relations were “on the verge of rupture.”

If all these things weren’t enough, markets and investors alike will be anxiously awaiting further details about the President’s early plans to combat drug cartels, given last month’s executive order designating them as foreign terrorist organizations, as well as Middle East peace efforts.

DeepSeek Shock & Threat: News of major breakthroughs by Chinese AI developer DeepSeek sent shockwaves through markets on Monday, January 27. The Nasdaq declined -3.1%, the SOX semiconductor index fell -9.2%, and AI darling Nvidia collapsed -17%, losing almost $600 billion in market cap [1]. The collapse in equity prices stemmed from fears that DeepSeek’s innovations would enable competitive AI capabilities but with less power and cheaper, less exclusive semiconductors. 

While AI-skeptics and market bears pounced on the news and may have felt vindicated, AI-bulls have argued that these innovations will only spur further AI usage and adoption, which should only support the budding technology and emergent industry. During the last two weeks, many of the DeepSeek-related market losses have recovered. 

It seems to us that in the long-term artificial intelligence is indeed transformational for many industries. But in the short-term, innovations and surprises like these can turn some companies’ prospects and stock prices upside down in a hurry, especially when equity valuations are arguably so expensive. It also raises questions about the ROI of massive AI-related investments, and whether the spending will continue at this torrid pace. Morgan Stanley, for example, forecasts hyperscaler capital expenditures may reach as much as $300 billion this year.

Resilient Economy for Now: Overall, the U.S. economy is “holding up”. Real GDP grew 2.5% in Q4 2024, and the unemployment rate ticked down to 4.0% last month [2]. But there appears to be weakness at the margins. Real GDP has been slowly trending lower since its recent high of 3.2% in Q3 2023, and the unemployment rate is up from a recent low of 3.4% in Q2 2023 – which is a little lower from its November 2024 high of 4.2%.

As we’ve shared before, the resilience of the labor market appears to be a major factor in keeping the economy out of recession. Historically, corporate earnings and stock prices indices tend to struggle if the unemployment rate jumps significantly. So far, as the unemployment rate remains low and continues to avoid escape velocity higher, stock indices have been proving the market bears wrong.

Historically, manufacturing and construction have been early warning indicators of labor market health. Therefore, it continues to catch our attention that job openings in both sectors continue their downtrend. If this signal deteriorates further, it would further substantiate concerns about the health of the economy as well as the earnings and equity outlooks. 
 

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[1] “Nasdaq drops 3% as China’s DepSeek AI model hits tech shares”, by Caroline Valetkevitch, January 27, 2025, Reuters.
[2] According to the Bureau of Economic Analysis and Bureau of Labor Statistics, respectively.

Paul Hoffmeister is Chief Economist and Portfolio Manager at Camelot Portfolios, managing partner of Camelot Event-Driven Advisors (CEDA), and co-portfolio manager of the Camelot Event-Driven Fund (EVDIX • EVDAX).

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Disclosures:
•       Past performance may not be indicative of future results. Therefore, no current or prospective client should assume that the future performance of any specific investment, investment strategy (including the investments and/or investment strategies recommended by the adviser), will be profitable or equal to past performance levels.
•       This material is intended to be educational in nature, and not as a recommendation of any particular strategy, approach, product or concept for any particular advisor or client.  These materials are not intended as any form of substitute for individualized investment advice.  The discussion is general in nature, and therefore not intended to recommend or endorse any asset class, security, or technical aspect of any security for the purpose of allowing a reader to use the approach on their own.  Before participating in any investment program or making any investment, clients as well as all other readers are encouraged to consult with their own professional advisers, including investment advisers and tax advisors.  Camelot Event Driven Advisors can assist in determining a suitable investment approach for a given individual, which may or may not closely resemble the strategies outlined herein.
•       Any charts, graphs, or visual aids presented herein are intended to demonstrate concepts more fully discussed in the text of this brochure, and which cannot be fully explained without the assistance of a professional from Camelot Portfolios LLC.  Readers should not in any way interpret these visual aids as a device with which to ascertain investment decisions or an investment approach.  Only your professional adviser should interpret this information.
•       Some information in this presentation is gleaned from third party sources, and while believed to be reliable, is not independently verified.
•       Camelot Event-Driven Advisors, LLC, is registered as an investment adviser with the United States Securities and Exchange Commission. Registration as an investment adviser does not imply any certain degree of skill or training. Camelot Event-Driven Advisors, LLC’s disclosure document, ADV Firm Brochure is available at http://adviserinfo.sec.gov/firm/summary/291798

Copyright © 2025 Camelot Event-Driven Advisors, All rights reserved.

Fed Policy & Market Whipsaw

by Paul Hoffmeister, Portfolio Manager and Chief Economist

Despite the fact that many leading economic indicators in recent years have been warning that a recession was just on the horizon, 2024 was a year of many positive economic and financial surprises, such as the AI boom (reflected in the stock performance of many megacap tech stocks), massive risk-taking appetites in stock and bond markets (reflected by rich valuations and tight credit spreads), and a resilient labor market and economy more generally. 

By last September, with inflation appearing to be increasingly contained and unemployment rising in a seemingly slow and controlled manner, the Federal Reserve terminated its 2022-2024 rate-hiking cycle and began what was expected to be a prolonged cycle of rate cuts. This policy pivot only added to the sunny risk-taking outlook. But in a year of surprises, it’s fitting that 2024 closed with another big one, as the Fed pivot got stopped in its tracks. 

Following the FOMC’s last three meetings (September, November and December), the Fed reduced the target funds rate by 100 basis points, to 4.25%-4.5% from 5.25%-5.5%. In September, when dovish expectations were at their highest, fed funds futures were expecting the funds rate would fall to 2.75% by year-end 2025. Today, the market expects only another 25 basis points in cuts. However, some banks and analysts such as Bank of America now assume no rate cuts this year.

So what changed? Perhaps the most important change has been the market’s expectations of inflation. In September, the 5-year TIPS spread was implying nearly a 1.9% annual inflation rate during the next 5 years. Today, the spread suggests an annual rate of 2.5%, which meaningfully exceeds the Fed’s long-term 2% inflation target. At the same time, labor market loosening seems to have stalled, with the unemployment rate falling to 4.13% in December from 4.17% in September. 

(5-year TIPS spread; source: Bloomberg)

With this change of dynamics within the Fed’s dual mandate, toward one of higher inflation amid a solid employment environment, the Fed is likely to be on an “extended hold” where forthcoming inflation and jobs data will determine the path of rate policy in 2025.

The significant change in the Fed outlook has clearly impacted financial markets, with the S&P 500 down more than 5% from its highs. But arguably the most impacted market segment has been in Treasuries, where for example the 10-year Treasury yield has sky-rocketed from 3.65% in mid-September to more than 4.75%. As we saw during the beginnings of rate-cutting cycles in 2001 and 2007, a little increase in long-term yields typically occurs after the first rate cut – somewhere between 20-40 basis points. But the recent 100+ basis point increase in the 10-year yield is highly unusual and is consistent with the quick change in the Fed policy outlook.

(10-year Treasury yield; source: Bloomberg)

We believe that the change in inflation expectations and shift in the Fed policy outlook has a lot to do with the presidential election and the anticipation that President Trump’s new economic policies, notably tax cuts and deregulation, which could spur economic growth and in so doing boost statistical inflation statistics. 

We wouldn’t be surprised if the President-elect and the Fed will again be in conflict over interest rate policy, as they were in 2017-2018. Incidentally, President Trump was arguably proven right then. In our view, the equity markets’ December 2018 selloff occurred largely in reaction to hawkish Fed comments at the time, and the tantrum compelled policymakers to quickly pivot to rate cuts in 2019.

For now, all eyes will be on the daily streams of economic data and the specific policy proposals out of Washington to forecast the path of inflation, employment and interest rates. We’ll likely see an unusually fast, perhaps unprecedented pace of policy changes in the coming months regarding taxes, deregulation, tariffs, immigration, and geopolitics. The influx will likely lead to much more economic and financial volatility.

Paul Hoffmeister is Chief Economist and Portfolio Manager at Camelot Portfolios, managing partner of Camelot Event-Driven Advisors (CEDA), and co-portfolio manager of the Camelot Event-Driven Fund (EVDIX • EVDAX).

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Disclosures:
•       Past performance may not be indicative of future results. Therefore, no current or prospective client should assume that the future performance of any specific investment, investment strategy (including the investments and/or investment strategies recommended by the adviser), will be profitable or equal to past performance levels.
•       This material is intended to be educational in nature, and not as a recommendation of any particular strategy, approach, product or concept for any particular advisor or client.  These materials are not intended as any form of substitute for individualized investment advice.  The discussion is general in nature, and therefore not intended to recommend or endorse any asset class, security, or technical aspect of any security for the purpose of allowing a reader to use the approach on their own.  Before participating in any investment program or making any investment, clients as well as all other readers are encouraged to consult with their own professional advisers, including investment advisers and tax advisors.  Camelot Event Driven Advisors can assist in determining a suitable investment approach for a given individual, which may or may not closely resemble the strategies outlined herein.
•       Any charts, graphs, or visual aids presented herein are intended to demonstrate concepts more fully discussed in the text of this brochure, and which cannot be fully explained without the assistance of a professional from Camelot Portfolios LLC.  Readers should not in any way interpret these visual aids as a device with which to ascertain investment decisions or an investment approach.  Only your professional adviser should interpret this information.
•       Some information in this presentation is gleaned from third party sources, and while believed to be reliable, is not independently verified.
•       Camelot Event-Driven Advisors, LLC, is registered as an investment adviser with the United States Securities and Exchange Commission. Registration as an investment adviser does not imply any certain degree of skill or training. Camelot Event-Driven Advisors, LLC’s disclosure document, ADV Firm Brochure is available at http://adviserinfo.sec.gov/firm/summary/291798

Copyright © 2025 Camelot Event-Driven Advisors, All rights reserved.

Rosy Outlook, Unfavorable Risk-Reward

by Paul Hoffmeister, Portfolio Manager and Chief Economist

At the end of October, we advised clients that betting markets were expecting Republicans to retake the White House and Senate, and that the biggest election uncertainty was whether they’d be able to hold on to the House of Representatives. Case in point, Polymarket was giving Republicans only a 51% probability to keep the House at the time, compared to 65% and 84% to win the presidency and Senate, respectively. Lo and behold, Republicans breezed through most of Election Night but their toughest challenge was winning the House, where they secured 220 seats for only a 5-seat majority – one of the narrowest in history. 

The slim House majority will make President Trump’s economic agenda a little more difficult to implement. Every vote will matter, and some legislators might view this as an opportunity or “leverage” to hold out for their favorite issues. But Administrations that sweep the White House and Congress typically enjoy enough political momentum to craft their preferred legislation early in their term. So, we expect the incoming Trump Administration will get key economic legislation passed and implemented during the first six months of 2025. 

President Trump will pursue an economic agenda propelled by tax cuts, making government more efficient and business-friendly, and rebalancing trade flows based on new tariff arrangements. 

This agenda will very likely start with making permanent President Trump’s 2017 tax cuts, which notably reduced the corporate tax rate (to 21% from 35%) as well as marginal income tax rates. Given that those tax cuts are scheduled to expire at the end of 2025, this will be important to accomplish quickly; not simply because of their expiry date but also to re-enliven animal spirits in an economy that seems to be slowing at the margin.

At the same time, we expect the new Administration, namely under Elon Musk and Vivek Ramaswamy through the newly created Department of Government Efficiency (“DOGE”), to aggressively pursue its government efficiency agenda. Their objective will be to identify and excise unnecessary government largess, while also eliminating excessive regulatory burdens on the private sector. In some respects, DOGE will be similar to Trump’s first-term deregulation efforts, but with additional emphasis on reducing government expenditures in light of the ever-growing federal deficit.  

And, of course, there will be new tariff measures or at least threats thereof; the purpose of which will be to rebalance trade flows in favor of the United States and/or compel foreign countries to act on specific issues. Already, we’ve seen President Trump threaten through social media new tariffs against Canada and Mexico unless those countries assisted with his new immigration agenda. 

Of course, China is in Trump’s crosshairs, and we don’t believe that this trade dispute will be resolved anytime soon. If recent events are any indication, then this variable will likely worsen before it improves. 

On December 2, the Biden Administration introduced new controls on semiconductor manufacturing equipment and software tools to limit China’s ability to produce advanced semiconductors. The following day, seemingly in retaliation, China announced its own export restrictions against the United States related to dual-use technologies for civil and military use, including controls on rare earth minerals. This was the first time that China specifically targeted certain exports against the United States, as opposed to all countries. These tit-for-tat measures by both sides exemplify the escalating tech trade war.

Overall, financial markets appear to view President Trump’s re-election and his economic agenda favorably. Since the close of trading on Monday, November 4 through Tuesday, December 9, the S&P 500 is up +6.0%, Nasdaq +8.6%, and Russell 2000 +7.8%. This business-friendly momentum was only underscored by President Trump’s announcement this week that his Administration will fast track environmental approvals and other permits for any companies investing $1 billion or more in the United States.

Reflecting the investor exuberance today, major equity indices are hitting all-time highs, and credit spreads are historically tight. For example, the extra premium that investors are currently demanding to own Baa-rated corporate bonds over Aaa-rateds is only 61 basis point, according to Bloomberg. Previous times that we’ve seen such a low risk premium (“tight” credit spread) were: early 2005, summer 2014, 2017, and late 2021/early 2022. 

At the same time, equity valuations are historically expensive. According to Bloomberg, the S&P 500 has recently traded at a price-to-earnings ratio of more than 25x, compared to a post-1991 average around 20x. In terms of its enterprise value to EBITDA ratio, the S&P has recently traded near 16x, compared to a post-1991 average around 11x.

Indeed, the business outlook looks rosy. Major tax and regulatory relief are on the horizon; the Fed is on a rate-cutting path; artificial intelligence has sparked a tech boom and could be transformational for the economy at large; and by virtue of their aggressive actions in Spring 2023, the Fed has a strong, recent track record of supporting the banking system as some financials navigate the inflation and interest rate surprises of recent years.

But when looking at today’s equity and credit markets through the valuation prism, there’s arguably not a lot of risk being discounted by financial markets today. While it seems counter-intuitive, the rosy outlook has heightened valuations to such a degree that the risk-reward profile is arguably unfavorable for risk assets.

Of course, the business-friendly outlook could be validated in coming months, existing risks might not worsen or new risks might not emerge, and the risk-on environment could therefore continue. So now, with the election uncertainty behind us, the biggest question facing investors might be whether this favorable outlook is sustainable. Given the relatively high equity valuations and tight credit spreads, it seems a lot of things will need to go right next year for investors to once again generate outsized returns. 

Paul Hoffmeister is Chief Economist and Portfolio Manager at Camelot Portfolios, managing partner of Camelot Event-Driven Advisors (CEDA), and co-portfolio manager of the Camelot Event-Driven Fund (EVDIX • EVDAX).

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